Is it the Right Time to Buy Yahoo?

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Yahoo (NASDAQ: YHOO) has been on a tear lately -- the stock is trading around $21 per share after rising almost 45% from the $14.5 level at the beginning of September. The new leadership of Marissa Mayer has certainly reinvigorated the company and provided a much needed motivational push, and investors have cheered the company's renewed energy.

Yahoo seems to be moving in the right direction. The question remains, however, is it a good purchase at these levels?

The Plan

Mayer has a plan for Yahoo, and it’s a well intentioned one. The basic idea is to make the company a “starting point for your daily habits,” like she wrote in a blog post about the renewed Yahoo home page. Yahoo plans to be more personal and intuitive, including information about your local weather forecast, Facebook (NASDAQ: FB) friends' birthdays and the ability to customize newsfeeds according to your own personal interests. The new homepage has been optimized for smartphones and tablets too.

More personal, more social and more mobile, the concept seems quite reasonable in terms of adapting to the prevailing trends. The company has also made some improvements in Yahoo Mail, which increased the portion of ads being clicked, and the revamped Flickr image sharing service got users uploading 25% more photos, as reported by Bloomberg.

Mayer is also planning to renew Yahoo Finance, which is one of the company´s most valuable properties. On a personal note, I have been using Yahoo Finance since 2001, and it’s an irreplaceable tool for both individual investors and finance professionals. But there haven´t been many big modifications to the site over this long time, which is quite astonishing considering how much everything related to the web has changed over the years.

This can be seen as an indication about how neglected certain important areas have been, and it also shows that there is a lot of room for improvement under a better and more dynamic management team.

Mayer has been making changes all over the corporate ladder, hiring new talent and making acquisitions in order to obtain the technology and human capital required to implement the transformation. Some recent purchases include Stamped, a mobile review app maker; OnTheAir, specializing in broadcasting video chats or interviews to online audiences;, which is a kind of clipping service for the web; and Propeld, which is a location-based apps maker.

The Challenge

Yahoo is trying to do the right thing, but it may be too late. Industry dynamics are changing quickly, and the company is facing harsh competition from titans like Google (NASDAQ: GOOG) and Facebook.

Google is completely dominant in search, with a market share of more than 67% in the US desktop search market, based on ComsCore data for January. According to this data, Yahoo´s alliance with Microsoft (NASDAQ: MSFT) and its Bing search technology has been more beneficial to Microsoft than to Yahoo. While Microsoft increased its share to 16.5% in January from 16.3% in the previous month, Yahoo saw decreasing market share from 12.2% to 12.1%. One year ago, in January 2012, Google had a 66.2% share, followed by Microsoft with 15.2% and Yahoo with 14.1%.

Google and Facebook are stealing share away from the company in display advertising too. In 2013 Yahoo’s share of the U.S. market will slip to 8%, from 9.3% in 2012. According to EMarketer, Google will widen its lead to 18% from 15% last year, while Facebook will advance to 15% from 14%.

Quoting more data from ComsCore, All Things Digital paints a dismal picture regarding traffic for Yahoo:

In November 2012, compared to November 2011, the monthly unique visitors to the homepage declined 17% to 91.8 million from 110.9 million; Yahoo Mail dropped 16% (from 92 million to 77.7 million); and Yahoo search dropped 28% (from 93.3 million to 66.9 million).

Also off significantly for all three areas, often by one-third, were a plethora of other stats: percentage of reach, total minutes, total page views, total visits and more.

Yahoo is well oriented in its new initiatives, but will that be enough to stop the decline? Once you are losing ground versus the competition, reversing the trend requires exceptional abilities and it can be a gigantic challenge. It's too early to make a definitive assessment about Mayer's plan and the chances of a successful turnaround for Yahoo, but investors need to consider the difficulties of the task.

Besides, market valuation is already reflecting many of the company's improvements over the last months: Yahoo trades a forward P/E of 17.5 versus a ratio of 15 for Google, so it’s not like the stock is selling at an excessively pessimistic valuation.

Bottom Line

Yahoo seems to be moving in the right direction, but it’s certainly not out of the woods yet; far from that, the challenges ahead are enormous. At current prices, the risk and reward tradeoff for Yahoo stock doesn't look very convenient.

Andres Cardenal owns shares of Google. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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